Discover Unikname Network – Episode 5: The many types of tokens
The world of crypto is full of somewhat confusing vernacular. Especially when it comes to cryptocurrencies. Are we talking coins or tokens? Isn’t it the same thing? What about that fungible and non fungible business? Maybe you’ve heard of security or utility tokens? What’s the difference?
To quickly answer these questions:
Coins are money
Tokens have more specific usage
Utility tokens unlock application-specific services
Security tokens represent financial assets
All of the above are interchangeable, and therefore fungible
NFT stands for Non Fungible Tokens and are unique and beautiful
Blockchains and their tokens have a very tight relationship. Incentives, rewards, security mechanisms, tokens can be a lot of things. Unikname Network has two types of token, the $UNIK and the UNIKNAME, that work together to enable named decentralized digital identities. A tall order! Let’s take a look at all of that and untangle it all.
Coins vs Tokens
Coins and tokens. The terms are sometimes used interchangeably. Or they pop up in very similar contexts. It’s enough to confuse anyone. But there are differences. In short, coins are native to their blockchains, they are almost exclusively used as currency, and are hard to create. Tokens on the other hand can be easily created on top of an already existing blockchain. They have very specific purposes from which they derive their value.
Need more details?
Out of all the tradables from the world of crypto, coins are the closest to traditional currency in their usage. Just like traditional coins, they are used to transfer or store value, i.e. as money. Additionally, and similarly to the speculation that occurs around dollars for example, the value they hold is subject to change. This change is particularly linked to the fluctuation in supply and demand of these coins. Consequently, minting new coins should be hard, and their supply should not fluctuate too much.
Coins are based on their native blockchains. Developing new coins is therefore complicated as it requires the creation of a new associated blockchain. Examples of coins include bitcoins (BTC), ethers (ETH), or even dogecoins (DOGE).
In summary, the main use of coins is to pay for goods and services. These services may be blockchain-based (on, or outside of the coin’s native blockchain), or even exist outside of the blockchain ecosystem. For instance, bitcoins pay for transactions, ethers are used to run smart contracts, etc. On May 22th, 2010, on what is now known as Bitcoin Pizza Day, Laszlo Hanyecz paid 10,000 BTC for two pizzas. Today, bitcoins and other coins can be used to pay for a large array of things.
Tokens: Utility – Security and the other ones
Similarly to coins, tokens can be used to store or exchange value. However, tokens are usually meant to do more, and even come with specific functionalities: granting its bearer the right to vote in an election, rewarding users when they perform a specific action, unlocking functionalities, providing access to a service, etc.
Tokens do not need their own blockchains. They can be created on top of existing ones. Ethereum smart contracts for instance are an easy way to create new crypto-tokens.
There exist a number of ways to categorize tokens based on their usage and a single token can fit in multiple categories. We can cite governance tokens, commodity tokens, transactional tokens, etc. The two most prevalent types of tokens however are security tokens and utility tokens.
True to their names, utility tokens provide their bearer with utility, most commonly access to services provided by the network. Golem’s token, the GLM, can be used to rent computing power. Brave’s token, the BAT, rewards the users for watching adverts. The BTT, BitTorrent’s token, is used to set downloading speed.
In these cases, the token’s price increases with utility: the more applications, the more value. It can also increase as the number of users grows, providing more demand.
The relationship between utility tokens and their platform is synergistic. The underlying platform guarantees the token’s security. In return the token enables activity that positively affects the platform’s economy.
Security tokens are similar to traditional securities, i.e. they are tradable financial assets. Owning a security token is equivalent to owning stakes in a company or product. The value of the token is therefore derived from the perceived value of the associated company or their future profit. In some cases, they can be equated to private stocks.
As financial products, security tokens are subject to a lot of regulations. Regulations and qualifications can vary between countries, which make security tokens harder to trade. In the US, the Howey test is used to determine whether an asset is a security. The test can be boiled down to four questions:
Was money invested?
Was the money invested in a common enterprise?
Is the investment expected to bring profits?
Are these profits coming solely from the efforts of a promoter or third party?
Point 4 of the Howey test implies a central governance, meaning that one entity should be responsible for making the investment grow.
Security tokens can provide equity (ownership rights), or they can be asset-backed (PAXG is backed by gold). As private stocks, they allow investors to get liquidity quickly as long as they can find a buyer.:
NFT: one-of-a-kind tokens
Coins, utility tokens and security tokens have one thing in common: they are fungible. This means that they are interchangeable. Just like traditional currencies such as euros and dollars, like the shares of a company, or the tokens in an arcade, every token is equivalent to any other.
NFT stands for non fungible tokens, and by definition, are one-of-a-kind digital assets. They can be used to represent an infinite number of things from the physical or digital world. The value of an NFT depends on its rarity but also on what kind of asset it represents: art pieces, basketball moments, furrever friends, etc.
What is the point you ask? Depends on the NFT. For art NFT for instance, it gives artists a great deal of control over how their art is sold and bought. It reduces the number of intermediaries and gets the money in their hands faster.
In general, NFT are easy to trade. The blockchain they are based on makes traceability accessible to all. This means less frauds, easier proof of ownership, no need for a third party to transfer the asset, etc. As they exist on decentralized platforms, NFT are truly owned by the one with the key. Here again, no third party needs to be trusted.
For every application that exists today, a dozen more could exist tomorrow. NFT could be applied to gaming (more on that soon), real estate, and even digital identity (what a great segway!)
The two tokens of Unikname Network
Lets refocus on us for a bit. This is an entry in the Discover Unikname Network series after all.
On Unikname Network, you will find two types of tokens, the $UNIK and the UNIKNAME. Armed with your new knowledge, can you tell what kind of tokens they are?
The $UNIK is a utility token. It unlocks features of the SSI (Self Sovereign Identity) platform. Unikname covers several use cases such as decentralized authentication, confidential data sharing, anonymous voting, etc. Each of these scenarios involve SSI service providers that operate on or using the Unikname Network blockchain. Their services require $UNIK. This is why, $UNIK are also called SSI credits.
To learn more about these use cases and how $UNIK are transferred between actors, you can take a look at our Whitepaper.
The UNIKNAME is a NFT. It represents your UniknameID in the chain. It is unique, just like your name, and strictly owned by you. UniknameID and their corresponding UNIKNAME can be traded. They have different rarity depending on their length (there are only so many three-letter words). The history of ownership is paramount to guarantee auditability on identity use cases.
The use of both types of token is required to unlock the full potential of Unikname Network and the associated SSI platform. Many SSI services require a UNIKNAME to function as well as SSI credits (i.e. $UNIK). $UNIK are also required to keep UNIKNAME alive.
But there is more! The $UNIK is about to become a multichain token. Our team is working on developing bridges to bring the $UNIK into the larger crypto ecosystem. Learn all about it here (article in french, english version coming soon).